In: Economics
Question
Bonia Corporation Bhd has posted positive earnings in FY17 including its latest fourth quarter ending June 30, 2017, but analysts are unsure if the company’s strategy to move into higher margin products will pay off. The company is mainly involved in the manufacturing and retailing of luxury leather goods, apparel, accessories as well as licensed international brands such as Braun Buffel.
To improve its earnings potential, Bonia has adjusted its pricing strategy by introducing higher-margin products, reducing discounts given out to customers as well as adjusting the prices for new product ranges, in particular for the Bonia and Braun Buffel brands. But will this be enough to sustain its profit record? Analysts say it could be a tough road ahead for Bonia.
Assume that you are one of the analysts and Bonia has approached you to assist them. What would be your recommendations? You are required to obtain as much information as possible on the status and forecast about the industry from the internet or any other sources. You may use Porter’s Five Forces model to help you in the analysis before you make your recommendations.
Bonia Corporation Bhd’s strategy to improve its earning potential has tough road ahead because, essentially, its product line--mainly involved in the manufacturing and retailing of luxury leather goods, apparel, accessories as well as licensed international brands such as Braun Buffel, is a monopolistic market form where there could be fairly large number of buyers and sellers who would be buying and selling similar products which are close substitutes in size, colour , shape and so on.
This makes it essential for Bonia to establish itself as a market leader and capture and retain its market share as well as try to enter its rival’s market.
It a careful market retention policy as well as a policy that would establish Bonia’s monopoly hold over such products—not in the pure sense but in the sense of consumer loyalty towards the company.
Leather products are goods that are made from animal skins. The global demand for such goods is likely to increase in the coming years. With the international market being poised to hoist more and more players in this field, competition could become tougher for Bonia and hence it has to keep two things essentially in its perspective—1. Its product policy, 2. Its rivals’ policies.
If Bonia wants to enjoy economies of scale—or lower per unit cost of production—then it could lead to a higher profit margin for the company, provided however that the sources of raw materials that it obtains from are such that they do not have much control over the price of raw materials and factor inputs required to produce the company’s products.
For example, if the company employs semi-skilled labor to be used in the production of leather goods then , if the labor are easily available or if the work can be outsourced to off shore units( considering the cost factor) then it would be advantageous for the company—assuming that just like there is competition in the product market there is also a high level of competition in the factor market such that it would reduce the price of the factor inputs required to produce the products.
Hence its very important to constantly assess the rivals’ power, their market share, the policy of the trade unions , if any involved in the production of the company’s products, the nature of the pricing policy and control factor owners have over the industry and so on.
Its also equally important to note if newer firms can enter the industry—since the forecast for leather goods is predicting a global growing trend, there is a possibility that the market may be flooded by a host of newer firms and this could lead to lower seller market power.
Hence its very important that Bonia retains and ensures that its monopoly content in the monopolistic market form—meaning—it is able to form and sustain a special place for its company’s products in the market –either through sustained consumer loyalty, global recognition of it s brand of products or through such pricing strategies that edge out the newer firms from the market and make it near impossible for the existing players to match up to its cost policies.
It should also consider government regulation in the given market which acts as an important tool for its competitive assessment.
All these factors require an in-depth market assessment and analysis. The results of the analysis should be clearly explained through various sample research results and the findings should clearly express the market trend for the products.
The company should formulate market strategy to inculcate the results of the research undertaken—including its pricing policies—cost analysis, competition in the product market and factor market, legal and governmental regulations, foreign governmental regulations as well as regulations placed on leather products by international organizations-if any.
The company should also consider rising above the existing firms in the market and maybe follow a market skimming policy --where it initially sets a high price for its products as a deterrent to avoid competition and retain its market share , on the assumption that its buyers are having brand loyalty and are not exactly price sensitive, or aim for a target segment of the market and hence retain its image in te otherwise highly competitive industry.